MICRO SQUEEZE

Funding for the smallest of businesses is harder to get.

By Abraham Hyatt

Nena Rawdah calls it “the first smack” — that moment this last December when she saw the economy was slowing and that it was going to hurt. It was the holidays and the streets of Portland’s St. Johns neighborhood where Rawdah’s bookstore sits were empty. The expected 20% jump in sales from last year wasn’t going to happen and the owners were going to have to make some hard decisions.

Three years ago, the future was bright. Rawdah and her then-business partner were facing the typical tiny business dilemma: great idea, minuscule personal equity and no way to raise startup capital. And while the availability of microlending in Oregon was dropping, the two partners were still able to get a microloan from Mercy Corps Northwest, Mercy Corps International’s local economic development office.

Microloans are short-term loans that range from a few hundred dollars to as high as $35,000. They’re made by nonprofit economic development agencies that get funding from federal agencies such as the Small Business Association (SBA), or from low-interest loans from banks and foundations. There are at least 60 agencies in Oregon that provide funding for the state’s estimated 275,000 microenterprises — those businesses with fewer than five employees and limited startup capital — and Mercy Corps Northwest is one of the largest.

The number of agencies making actual microloans has decreased in recent years. Part of the drop is because of a loss of state and SBA funding, says Lisa Dawson, executive director of Northeast Oregon Economic Development District. Part of it stems from rising administrative costs — increased insurance premiums is one culprit — that force agencies to cut the number of programs they offer, says Diane Searle, a program manager with Cascades West Council of Governments.

And now comes the economic slowdown. Here’s what is likely to happen: Microenterprises will go back to microlenders for help. Newly laid-off Oregonians will look for microloans to start businesses. Banks will be even more reluctant to lend money to startups. And microlenders will be even more squeezed, says Valerie Plummer, executive director of the Oregon Microenterprise Network.

Plummer knows this because it’s what happened in the last recession in 2001, when Oregon’s tiniest businesses saw the bridgeable gap between dreams and profitability widen into a deep chasm. Then, as now, it’s impossible to quantify the number of people who won’t be able to get microfunding, or tally the amount of funding that will dry up due to the downturn.

What is known is that one avenue of help for Oregon’s microenterprises — which employ as much as 20% of Oregon’s workforce — is going to be harder to get.

In 2005, Rawdah and her business partner opened St. Johns Booksellers — tucked between two brightly painted Mexican food joints on North Lombard — on a shoestring budget. Half new books, half used books and lots of kids books — the store did so well it was featured in an international bookseller organization’s 2007 calendar.

Then came Rawdah’s “smack” and an unexpected 9% drop in holiday sales. “We were expecting some small growth this year. But we see [customers] are taking this seriously,” she says. “Now we’re expecting no growth.”

Planned improvements to the store are on hold. The ratio of inventory between new and used books is being re-evaluated to hopefully better match customer demand. And with those decreased expectations for growth, the partner needed out. Rawdah had one choice: She applied for another microloan from Mercy Corps Northwest to buy out her partner, and got it. She says her approach to the next year is “very cautious.”

Because of the mix of agencies and funding sources that are involved, no one tallies the exact number of microloans that are given in the state in a specific year. But numbers from individual agencies are illuminative. Mercy Corps Northwest, for instance, gave 23 microloans in 2007 for a total of $260,000. Since 2001 the agency has made 140 microloans totaling $1.3 million.

Oregon also provides funding for microloan programs. According to Plummer, 2,850 microenterprise owners received $1.5 million from the state during the 2005-2007 biennium, which either created or retained about 1,158 jobs.

Microlending has been on the rise in Oregon over the past decade. In 1998, Oregon Microenterprise Network was started as a sort of umbrella agency by nine Oregon microenterprise support agencies. Today, there are 60 member agencies, each offering clients different types of funding and support. Microloans are only part of the picture. Lending programs go hand-in-hand with other programs that teach people how to write or improve a business plan, the basics of bookkeeping or just the fundamental nuts-and-bolts of entrepreneurism.

This is where microfinance blurs the line between “banking” and social and economic development. A 2004 national study by the Corporation for Enterprise Development found that 30% of the people who take advantage of microenterprise programs are at or below the poverty line; 60% are in the low- or moderate-income bracket. Multiple national studies show double-digit decreases in poverty rates and reliance on government assistance among those who start their own microenterprises.

Plummer is an understandable cheerleader. “Microenterprises are really the biggest job creators in [rural] areas. They’re doing the most exciting work,” she says. “In Elgin and Lakeview, there’s no new Intel. They’re really looking to entrepreneurs.”

And entrepreneurs are looking for money. Microloans have funded an Enterprise busines that imports and packages tea, a sign company in Elgin, and an outdor supplies store in La Grande. That’s only one side of microenterprise; Oregon is not all rural. Microloans were also behind a commercial printer in Albany, a women’s clothing store on Belmont Avenue in Portland and a flower shop in the Pearl District. And, of course, a bookstore in St. Johns. But no matter where a microbusiness might be, it’s going to be at risk in the next year, says Anthony Gromko, a loan officer with Mercy Corps Northwest.

“It’s going to be a huge challenge for our clients,” he says. “Unemployment rates will be rising and people will be budgeting tighter and tighter. It’s going to be harder to start businesses.”

In March, the head of the SBA held a closed-door meeting with the nation’s top bank executives to talk about small-business credit and how banks had been tightening their credit standards. Nothing was decided in the meeting, but it’s an issue that isn’t going away. If standards tighten further, it could push more small businesses into the microloan pool. Shawn Winkler-Rios, executive director of Lane Microbusiness in Lane County, says his agency has been courting banks and other financial institutions to create a microloan pool. The outlook for raising money is good, he says.

But that’s only one corner of the state. Like many others in the microlending community, Dawson sees a possible increase in demand for startup information and funding across the state. Competing with those people will be existing microenterprises looking for more funding. And so it’s inevitable that some will be left wanting: Business plans will remain as plans; teetering microenterprises that might have been rescued by additional funding in a different year will fail.

Rawdah knows she is on her own. She has 13 years of experience as a bookseller and Mercy Corps Northwest taught her the nuts and bolts of running a business. She already has a few years of successful experience to lean on. And like many business owners, large or small, she is positive, if pragmatic, about the future.

“People are still buying houses here,” she says, hopefully. “This is still an up-and-coming neighborhood.”